Audit market is 'broken', says MP leading inquiry

Audit failures have rendered company accounts “works of fiction”, according to the MP leading an investigation of the scandal-hit sector.

Labour MP Rachel Reeves, chairwoman of the Business, Environment and Industrial Strategy Committee (BEIS), said the audit market is “broken” and that high profile failures – including Carillion – have undermined public trust in business.

Speaking in London this morning to mark the start of a BEIS inquiry into the sector, Reeves said “all options are on the table”, including measures to break the “stranglehold” of the ‘Big Four’ audit firms – EY, Deloitte, KPMG and PwC.

“Misleading audits have been at the heart of corporate failures over recent decades. Recent accounting scandals at BHS, Carillion, and at Patisserie Valerie have shown accounts bearing closer resemblance to works of fiction than an accurate reflection of the true financial performance of the business,” she said.

She said the collapse of Carillion implicated the entire audit industry and that doing nothing about the situation was “no longer an option”.

The BEIS committee inquiry launches nearly a month after the Competition and Markets Authority (CMA) kicked off its own review of the sector, which aims to report by the end of the year.

Last week, KPMG said it would stop selling non-audit services to FTSE 350 clients. EY and Deloitte have called for laws similar to in the US, which hold company bosses personally responsible for accounting mistakes.

In an October report, the FRC said the Big Four frequently gave lucrative consultancy services to large corporates whose books they also check, prompting worries that they may not provide sufficient challenge to the management of such companies when auditing them.

It said it would review its own guidelines for auditing and ethical standards, which currently allow the firms to undertake both auditing and consultancy at the same time.

The FRC also criticised KPMG, the auditor of Carillion until its collapse this year, finding a “deterioration in the quality of the audits that we inspected to an unacceptable level”.